Australia's CBA posts record $6.7 billion full-year profit amid business lending push

Commonwealth Bank of Australia reported record full-year cash earnings of A$10.25 billion and its highest-ever dividend payout, driven by robust lending growth, particularly in business banking where it gained significant market share, and lower loan impairment expenses. Despite these strong results, CBA shares fell 4% as analysts cited its expensive valuation, being 'priced for perfection,' and a profit boost from volatile trading income. The bank also noted an increase in 90-day home loan delinquencies to a 2018 high, signaling potential underlying credit quality concerns despite overall improved economic conditions and recent interest rate cuts.

Analysis

Commonwealth Bank of Australia (CBA) delivered record full-year cash earnings of A$10.25 billion, marginally ahead of consensus, and its highest-ever full-year dividend of A$4.85 per share. The result was underpinned by strong lending growth that outpaced the system average, particularly a 12.2% expansion in business lending which increased market share against rival National Australia Bank and lifted business banking cash profit by 8% to A$4.1 billion. Favorable macroeconomic conditions, including three interest rate cuts by the Reserve Bank of Australia, contributed to lower loan impairment expenses and an expanded net interest margin, which rose 9 basis points to 2.08%. Despite these headline achievements, the market reacted negatively with shares falling 4%, reflecting significant underlying concerns. Analysts flagged that the stock is 'priced for perfection,' with a price-to-book ratio more than triple the industry median, and noted the bottom line was inflated by a volatile A$125 million lift in trading income. A critical emerging risk is the deterioration in credit quality within the mortgage book; despite 85% of customers being ahead on repayments, 90-day delinquencies rose 5 basis points to 0.70%, the highest level since at least 2018, indicating pockets of stress from cost-of-living pressures.

Key Decisions for Investors

• Given the stock's premium valuation and the negative market reaction to a record result, investors may consider trimming positions or taking profits, as the 'priced for perfection' sentiment suggests limited tolerance for any future disappointments.
• The rise in 90-day mortgage delinquencies to a multi-year high is a key red flag; investors should closely monitor future credit quality metrics, as further deterioration could signal a turning point in the credit cycle and erode future profitability.
• While the core mortgage business shows signs of stress, CBA's strategic and successful expansion into the higher-margin business lending segment should be tracked as a potential long-term growth driver that could partly offset weakness elsewhere.